Pulling It Together: The “R” Word Is Back

Dec 09, 2008

Longer ago than I care to admit, I got my start in health policy at M.I.T. when I wrote a book about health care regulation. The book was about a long forgotten attempt to rationalize the health care system through an elaborate health planning program set up in the seventies under the National Health Planning and Resources Development Act. It established a system of federal, state and regional planning bodies to control health care costs by limiting the supply of medical services and facilities and slowing the diffusion of costly new medical technologies such as CT scanners. It didn’t work very well. It turns out people at the local level preferred medical self-sufficiency to “planning;” in more than a few communities people actually marched on local planning bodies when they were told their local hospital was no longer designated to deliver babies or could not renovate. In my home state of Massachusetts, the legislature famously passed a law exempting a nursing home from certificate of need on the shaky grounds that it was the only nursing home serving Lithuanian patients.

Over time the frontal assault on supply was replaced by a different approach to controlling costs: payment controls. Costs would be restrained through limits on what providers could charge. Several states — including Massachusetts — mounted rate setting experiments and the federal government began its DRG system for reimbursing hospitals under Medicare. President Carter proposed national regulation of hospital revenues and capital costs, though his effort was blocked by an industry attempt at self-regulation called the Voluntary Effort. Indeed, many who were involved at the time would have said that the creation of the Health Care Financing Administration (HCFA, now CMS), where I worked in HCFA’s early years as a young staffer in the administrator’s office, was motivated in large part by a desire to restrain costs and drive change in the health care system more broadly through the leverage of government payment policy.

I tell this history to make the point that while it may seem remarkable now, the dominant paradigm in health policy not too long ago was regulation. Then, following the Reagan revolution, regulatory approaches in general fell into disfavor. The health planning program I wrote the book about was repealed and the state rate setting experiments, which were federally sanctioned, were discontinued. Managed care rose and fell in the mid-nineties, but market-based solutions continued to dominate the health policy discussion, particularly in Washington. The structuring of the Medicare drug benefit around competition between private plans, each offering a different benefit at a different price, was a powerful illustration not just of the dominance of interest groups but of the political aversion to regulation that until recently held sway.

With the financial meltdown and the victory by Democrats who favor a more interventionist role for government, there is renewed interest in regulation and government oversight to make the marketplace work more effectively and safeguard consumers, including in health. Virtually all the major health reform proposals now on the table — including those from President-elect Barack Obama and Senate Finance Chair Max Baucus — contain some regulatory features. Most often discussed are requirements that health insurers take all comers without surcharges for people with pre-existing conditions (often tied to subsidies or an individual mandate to ensure that risk is spread broadly), and limits on the amounts insurance companies can charge for administration and profit. These proposals do not go nearly as far as the Clinton health reform plan did, which also proposed regulation of health insurance premium increases and underlying hospital charges and doctors fees, but they represent a marked change from the recent anti-regulatory mood in Washington or the positions taken by Senator John McCain, who opposed regulation of the health insurance industry.

Other currently popular ideas have a regulatory flavor as well: establishing a national comparative effectiveness research institute to, ultimately, provide guidance, or perhaps more, on what to pay for and what not to; a federal reserve-type body for health care with potentially sweeping authority; pay for performance; requirements that providers adopt standards for IT; and giving the Secretary of HHS power to negotiate drug prices under Medicare. And interest in regulation is not limited to Washington. For example, the Boston Globe recently ran an editorial calling for a return to state regulation of provider rates. Echoing concerns about the challenge of controlling costs in the context of health reform and of keeping premium increases down, the Globe said: “The state needs a better rate setting system to ensure that the reform law does not become the Big Dig of health insurance”.

The regulatory components of health reform may have staying power if health reform legislation moves forward because regulation does not require federal expenditures and will be popular with the public. They strike right at the concerns the public has about costs, which has propelled health care forward, but don’t bring the high price tag policymakers will have to struggle with in order to pay for coverage expansions. They do, however, require taking on interest groups who will be affected by regulation, particularly insurance and drug companies. In the language of political science, they have concentrated costs (for strong interest groups) and diffuse benefits (for the public). Often such measures are defeated, but the prospects are greatly improved in the current health reform environment where elected officials will be operating in the public spotlight and looking for inexpensive ways to address the public’s concerns about health care costs.

Our polls have long shown that the American people support regulatory action in health, even when they are given the arguments for and against it. This has been true even when the mood in Washington was pro-market and anti-regulatory. This is not surprising, since people are not really ideological about these things; they just want relief from health care costs and will support regulatory or market approaches if they think they will deliver it. What has changed is the appetite among policymakers for regulation and oversight in health. The pendulum has certainly not swung completely and the current mood about regulation in no way resembles the one I studied in the seventies. The paradigm now is a mixed approach: part market and part government oversight and regulation. But the “R” word is back, not just in the financial world but in health care too.